The Finance Case Of The Decade Will Come Before The Supreme Court on Thursday

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In the name of $1.7 billion, a group of hedge funds has followed Argentina from Ghanaian ports to Belgian bank accounts and even into space.

On Thursday, the group will make the final stop on its odyssey: the front door of the U.S. Supreme Court.

Argentina is asking the court to hear this peculiar case, which stretches back more than a decade, when the hedge-fund group first bought debt as Argentina teetered on the brink of financial ruin. The court will likely make a decision favoring the country or the hedge funds before its session is over at the end of the month.

The group or Argentine bondholders, headed by Elliott Management's Paul Singer, want to be paid 100 cents on the dollar. In response, the Argentine government has called the holdouts "vultures," vowed never to pay them what they're asking, and put on a show of political theater Tony-winning proportions.

Judge Thomas Griesa, of the Second Circuit Court in New York, decided back in November 2012 that the holdouts were right. "The fact is that the amount owed to plaintiffs by Argentina is the accelerated principal plus accrued interest," he wrote. "Argentina owes this and owes it now."

Unwilling to cede, Argentina has appealed to the highest court in the United States, again pleading that favoring the holdouts is a violation of its deal with all bondholders. According to its contract, it says, it cannot negotiate the terms of its bond prospectus until the end of 2014, regardless of what the holdouts feel they're entitled to.

So Argentina will not pay now. In fact it believes it cannot pay now, if it is to honor its contract with bondholders who did restructure — exchange bondholders. And it may not pay, ever: In May, a memo between the country and its lawyers was leaked. It outlined a plan to avoid paying the holdouts even if the Supreme Court maintain Griesa's ruling.

This kind of intransigence has come with consequences. Despite making inroads paying collapse-era debts to organizations like the Paris Club and making nice with nemesis the International Monetary Fund, this fiasco with the holdouts is still locking Argentina out of international markets. Buenos Aires canceled a bond issue last month as interest rates on the bonds were too high. Argentina's Central Bank reserves are at its lowest point since the last crisis — about $28 billion.

The country needs cash. But as long as Paul Singer is chasing it around the world, it will not have it.

So the holdouts do not get their money, and Argentina's assets are chased all over the world.

Most people started paying attention to this case in the fall of 2012. That's when the hedge fund holdouts pulled off a spectacle the likes of which Wall Street had never seen. Argentina's naval vessel, La Fragata Libertad, was sitting in a harbor in Ghana. In what was for all intents and purposes a total pirate move, the holdouts managed to get a Ghanaian court to impound it for them as collateral.

For months the ship and its crew sat while the International Maritime Court of the Sea deliberated the issue. In Argentina, President Cristina Fernandez de Kirchner was spitting fire.

And that fire stayed burning.

Almost a year later, in August 2013, after having to fly commercial to avoid the holdouts impounding her plane, after appealing to courts that the holdouts should not be able to discover where the country's assets were kept outside the U.S. — a violation, she maintained, of the law governing this case, the Foreign Sovereign Immunities Act — she still invoked anger over La Fragata Libertad in one of her most epic speeches.

"When we had the issue with our the La Libertad, we held on, and we didn't give an inch to the vultures. When others said, 'pay the vultures to recuperate La Libertad'... to recuperate it with dishonor? Never. And as an Argentine, and the commander of the armed forces, we could only get it back with honor. And for that, Argentines, we must understand that there is a lot at stake."

Argentina appealed to Judge Griesa's Second Circuit, arguing that the court was setting a dangerous precedent for international bond markets. If anyone could just hold out and sue instead of restructuring their debt, why would anyone ever restructure again?

But again, Argentina lost. In rejecting this appeal, the Judge was even more brutal.

"[T]he proposal submitted by Argentina ignored the outstanding bonds and proposed an entirely new set of substitute bonds. In sum, no productive proposals have been forthcoming. To the contrary ... counsel for Argentina told the panel that it "would not voluntarily obey" the district court's injunctions, even if those injunctions were upheld by this Court. Moreover, Argentina's officials have publicly and repeatedly announced their intention to defy any rulings of this Court and the district court with which they disagree ...

"What the consequences predicted by Argentina have in common is that they are speculative, hyperbolic and almost entirely of the Republic's own making ... "

The Financial Times' editorial page joined the chorus: "Ms Fernández has spent too long behaving like a sulky adolescent. It is time to grow up," it wrote.

But there are those who agree with Argentina. While most bond agreements now come with Collective Action Clauses (CACs) that compel all bondholders to restructure if the majority of them do, there are agreements that slip through the cracks.

According to economist Nouriel Roubini, one of those agreements is in Greece. He says that CACs don't go far enough there because they need aggregation clauses — clauses that would apply terms accepted by a majority of creditors across an entire series of debt (think: Argentine bond 1 and then the new reissued bonds). Greece's financial crisis era debt was issued in a number of different jurisdictions, and Roubini believes that makes it vulnerable to a lawsuit like this one.

The International Monetary Fund, while unwilling to file a formal brief on the issue, has said that it "remains deeply concerned about the broad systemic implications that the lower court decision could have for the debt restructuring process in general."

The only move left for Argentina was to go to the Supreme Court with a two-pronged attack — one arguing that the holdouts had to stop chasing Argentine assets around the world, the other asking the Supreme Court to hear its case. Both should be decided by the time the court ends it session at the end of the month.

If the Supreme Court decides to hear Argentina's case, the country at the very least will have bought itself time until 2015, when its bond prospectus says it can negotiate with the holdouts. In this case, Cristina Fernandez will probably go on an epic shopping spree.

Most likely, though, the Supreme Court will ask for advice and call for an opinion from the Solicitor General. The Solicitor General has sided with Argentina in the past, but given the country's leaked memo and continued intransigence, who knows what could happen this time around. This could still be good for the country though, because again, this could buy it more time.

But then there's this: "The worst thing that could happen for exchange bond holders is that the Supreme Court says there's no federal case, no issues, no U.S. government opinion and lifts the stay on payment," says Federico Zaldua an Argentina-based trader on Itau BBA's Latin America bond desk.

In that case, Argentina will find itself either in violation of its prospectus, or in violation of a U.S. judge's ruling. Think of it like an explosion going off.

"If this happens many questions will be raised," said Zaldua, "but what I'm sure of is that prices will go down very sharply in the beginning and then go up. If the worst case scenario happens I'm buying Argentina bonds."

Zaldua says he'll buy because, while there will be chaos in the immediate aftermath of the decision, eventually Argentina will be forced to negotiate with the holdouts. Being forced to negotiate isn't a violation of its prospectus — but it has to be forced.

Or maybe it won't negotiate at all.

Argentina could — against all rationality — maintain that it will not pay "the vultures." Cristina Fernadez will make some epic speeches, and the few Argentine's left with the stomach for this will be mollified. The country will remain a pariah of international markets, unable to replenish its coffers through bond sales.

"Of course, the disaster window is always open in Argentina," said Zaldua.